Bank of Canada in Wait and See Mode – Canadian Dollar Gains
The Bank of Canada made no change to interest rates. But just about a month ago, the Bank of Canada surprised markets and created uncertainty. The Bank of Canada seems confused, preemptively reducing interest rates, indicating $60 oil as a benchmark, and then doing nothing while oil continues to be lower than their targeted level. Now, it seems to be a more balanced outlook. It was only a week ago that a rate cut was expected, until a speech that indicated it wasn’t. The Bank of Canada has created a level of uncertainty that is not needed.
The ripple effect of the Bank of Canada’s wavering and micromanaging impacts big business, small business, and a large number of Canadians. What we know for certain is the Bank of Canada is watching oil prices closely. Therefore, oil is the canary in the coalmine. Oil prices seem to be dictating the Bank of Canada’s moves. If oil falls to $40 or less, will the Bank of Canada cut rates again? Nobody knows because the Bank of Canada has indicated a $60 benchmark for oil, but we still don’t know how firm that level is or even if it still applies today with the better than expected recent GDP data.
The ripple effect of falling oil prices still needs to trickle through Canada’s economy. A few months of GDP data points will indicate just how bad things can get (or not). For the future, if oil prices stay in the $50 range, the Bank of Canada should be more clear with respect to if it is in a rate cut mode or in more of a neutral stance. Currency swings of 3% (last announcement) and almost 1% today create big impacts for importers and exporters and the Bank of Canada needs to also consider stability in the Canadian dollar as an important characteristic and not just being “ahead of the curve” or guessing how things will play out with oil.
Last announcement, the Bank of Canada was in panic mode, today it is more patient. The question still remains, was the last rate cut surprise even needed? In retrospect, it appears not. This is clearly evidenced by the Bank of Canada’s more neutral outlook today.
Look for the Canadian dollar to gain some steam today based on the recent Bank of Canada announcement, however, this will be short lived, as the US dollar strengthening story is too strong for the Canadian dollar if the US economy continues to remain strong.
By Admin | March 4, 2015 | Daily Update |
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